A Grade net face rents in Sydney’s CBD grew 8.7 percent in the 12-month period to September 2018, while average A Grade capital values increased 6.8 percent, breaking the $20,000 per square metre mark for the first time in history, according to Savills latest research.
The Q3 National Office Quarter Time report highlights this as a “less pronounced” growth rate, following two years of globally leading growth figures on rents and capital values.
Growth in spite of subdued economic conditions
These growth rates are more muted than the double-digit growth rates that we have seen throughout the past two years.
What is remarkable is that we are still seeing growth in rents on both a face and effective basis, in spite of relatively subdued economic conditions since 2016, pointing to the ongoing resilience of the Sydney CBD office market.
With an economic turnaround now evident in Australia, and forward-looking indicators the strongest they have been in more than 18 months, it would be prudent to assume there is steam left in Sydney CBD’s performance.
Growth in professional job advertisements for NSW were at their highest levels since mid-2016, recorded at 9.9 percent in the year to August 2018. This suggests ongoing strength in leasing demand for Sydney’s office markets.
While 12-month net absorption numbers for Sydney’s office markets have been softer than other office markets nationally, the simple case is that you can’t have net absorption if there is no available space to lease. This is the case across Sydney’s CBD and non-CBD office markets.
With a vacancy rate of 4.6 percent, the lack of contiguous space in the CBD is driving tenants to Sydney’s fringe markets.
We are seeing a greater level of enquiry across North Sydney and other North Shore markets, with major tenants like Nine, NBN and Mastercard signing leases for 10,000sq m-plus spaces in these areas.
Pre-commitment activity for new developments in these markets, and particularly in Parramatta, is high.
The report identifies the yield compression cycle continuing in the Sydney CBD, with average A Grade market yields falling 40 basis points in the 12 months to September 2018.
Interest in Sydney CBD office assets remains strong
Throughout the same period, Savills research recorded $4.82 billion of office transactions in Sydney’s CBD (for sales more than $5 million), nearly 30 percent of total office transactions nationally.
While foreign investors are accounting for a lower proportion of purchaser types in the CBD, this is more so because their focus remains on 100 percent sales and prime assets.
Even so, foreign investors accounted for 37 percent of all purchasers in the Sydney CBD in the 12-month period to September 2018.
The fundamentals for the Sydney CBD office market are stronger than ever.
Not only are we seeing continued interest in the CBD from investors, tenant enquiries remain strong, in spite of record high rents and capital values across the CBD, and alternative options available in Sydney’s fringe markets.
According to the report, the upcoming development cycle should provide some relief to tenants.
Net face rents are expected to increase in line with inflation after 2019 for a four-year period, with rising incentives pushing net effective rents down somewhat.
Capital value growth is expected to continue but again, at a more subdued rate.